Tuesday, December 27, 2005

 

The Worlds Biggest Market Gets Bigger

Elliott Wave International has this look at the forex market. "Forex brokerage business has never been better. With the number of new accounts exploding by 500% or more, brokers’ revenues are skyrocketing, too. This enormous boost in forex trading activity may be partially due to fear. Fear of holding U.S. dollars, that is."

"The buck had been on a losing streak since 2000, until exactly one year ago, when in December 2004, it hit an all-time low of $1.36 against the euro. It was around that time when many American investors began waking up to the idea of 'protecting their wealth' through currency diversification."

"Ironically, and typically, the peak of this 'grass-roots interest in other currencies' proved to be the worst possible moment for moving out of U.S. dollar holdings. Ironically, because the dollar’s multi-year slide ended on December 30, 2004, catching even 'most professional currency managers off guard and causing them to lose a lot of money' (Reuters). And typically, because the public usually joins the trend right at market reversals."

"While more 'convenient,' forex trading is by no means risk-free. In fact, risks can be even bigger than in stock trading because currency speculators often use leverage of up to 200 times the value of their cash (compare that to the 1:2 margin typically offered to stock traders.) Plus, the day-to-day volatility, a blessing for the nimble forex players, can be devastating for the less-prepared ones."

"While more 'convenient,' forex trading is by no means risk-free. In fact, risks can be even bigger than in stock trading because currency speculators often use leverage of up to 200 times the value of their cash (compare that to the 1:2 margin typically offered to stock traders.) Plus, the day-to-day volatility, a blessing for the nimble forex players, can be devastating for the less-prepared ones."

"And U.S. based forex speculators are less-prepared. One broker says, 'U.S. [forex] retail investors still don't understand what they are doing compared with overseas investors' (Reuters.) As a result, 'if 15% of day traders are profitable, I'd be surprised,' says another broker (WSJ)."

Comments:
Personally, I don't hold currencies on margin, but directly in an interest bearing account.
 
I speculate on the value of currencies on hedgestreet.com. I found that speculating on the closing value of currencies to be more profitable and less risky than investing directly in the FX market.
 
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